January 10, 2014

SEC Strikes Out Again in Court

The U.S. Securities and Exchange lost its fourth trial in four months when a federal judge in Atlanta ruled against the agency in an insider-trading case.

U.S. District Judge William Duffey, Jr. this week took the SEC to task for its "overreaching, self-serving interpretation" of evidence in the case against Ladislav "Larry" Schvacho.

The defeat follows a pair of courtroom losses for the SEC in December - one in an accounting fraud case in Los Angeles, the other in a securities fraud case in Kansas. And in October, the agency lost its high-profile insider trading case against billionaire Mark Cuban in Dallas, but did win a jury trial in a Tennessee securities fraud case and another in Minnesota. An agency spokesman declined to comment.

The SEC alleged that Schvacho, a close friend of the then-CEO of an employment staffing company, bought 72,000 shares of the company’s stock based on inside information about a pending merger, making more than $500,000 in illicit profits.

The problem, Duffey found after a two-day bench trial in November, was that the SEC couldn’t prove wrongdoing. According to Duffey, who was nominated to the bench by President George W. Bush in 2003, the SEC’s “proof of the insider-trading is based on circumstantial evidence.” However, that wasn’t enough to show “by a preponderance of evidence, that Schvacho misappropriated insider information to make the trades alleged by the SEC.” Duffey issued his ruling on Jan. 7.

What the SEC could show was that Schvacho bought a lot of stock in the company, Comsys IT Partners Inc., between November 2009 and February 2010, when the merger was announced, and that he was good friends with then-CEO Larry Enterline. The two spoke often on the phone and took an overnight sailing trip together while the merger was pending.

The SEC argued that “a ‘pattern’ exists between conversations [between the men] and stock transactions that shows, circumstantially, that Schvacho had engaged in trading activity using inside information,” according to Duffey’s opinion.

While Duffey found this “facially interesting,” he determined that it fell short of proof. The SEC introduced no evidence of the content of the phone calls, or even the text messages between the men (an omission that the judge found “telling since text message content often is available from providers of text messaging services.”)

“The SEC’s suggestion that each of the conversations they referenced was followed by a trade in Comsys stick, and thus the communication must have included inside information, is not supported by the evidence,” he wrote.

But what really seemed to sway him was Enterline’s credibility. The former CEO was adamant he did not reveal inside information. Duffey described Enterline as “a business professional with an unblemished history of leadership in the private sector” and wrote that he “testified emphatically that he did not and would not disclose proprietary, inside information to Schvacho or any other person.”

Enterline also testified he did not know Schvacho bought stock in his company and is no longer friends with him. Because his testimony was credible and believable, Duffey found that Enterline “discredited the SEC’s interpretation of the evidence.”

“The court ruled for Mr. Schvacho on every contested point,” said Schvacho’s attorney Ross Albert, a partner with Morris, Manning & Martin in an emailed statement. “We pointed out to the SEC these very same problems with its version of the facts multiple times, long before the case was even filed. It should never have gone to court.”